On Sept. 25, Ctrip.com International (NASDAQ:TCOM), China's leading online travel site, announced that Chinese search engine giant Baidu (NASDAQ:BIDU) planned to sell more than 31 million shares of Ctrip, or approximately 30% of its stake. Baidu, which is facing increasing competition in its core search business, has sought to diversify its investments in recent years by adding exposure to high-growth areas including artificial intelligence, autonomous driving, and smart speakers. In conjunction with the sale, on Sept. 27, Ctrip announced that the price on a proposed secondary offering would be $28 per American depository share.
The pricing on the secondary offering is significantly lower than the share price on the day of the Baidu sale announcement, and it will mean that Baidu may haul in quite a bit less than the initial $1 billion estimate. Ctrip shares began their initial descent following the Baidu disclosure, dropping 7.3% on Sept. 26 and tumbling 2.7% lower on Sept. 27 to close the week at $29.02.
Baidu acquired a 25% voting stake in Ctrip back in October 2015 to become Ctrip's largest shareholder, and its 105-million-share holding represented an 18% ownership in Ctrip by the time of the sale decision. Although Baidu will remain Ctrip's largest shareholder at the completion of the sale, parting with a significant chunk of the investment is far from an endorsement for Ctrip. Secondary share offerings are generally not well received by investors because of their dilutive effect on earnings, but this sale by a major stakeholder and well-known company is particularly concerning for Ctrip investors.
Roadblock after roadblock
News of Baidu's reduced investment is yet another challenge for Ctrip, which has been hurt by a slowing Chinese economy, the U.S.-China trade dispute, political instability in Hong Kong, and tensions between China and Taiwan. These pressures prompted Ctrip to lower its year-over-year third-quarter revenue growth forecast to 10% to 15%, which at the midpoint marks a deceleration from the 15% growth witnessed in the same quarter last year. Ctrip operates in the cyclical travel industry, and consumers tend to spend more on air travel during times of economic prosperity.
A good long-term investment?
The long-term growth investor may be wondering whether the recent decline in Ctrip, which recently proposed a name change to Trip.com Limited, has created a good entry point. Although the near-term outlook is cloudy, Ctrip, which holds a 37.6% share in China's online travel agency market, has reason to think the far future will be bright. The International Air Transport Association stated that China is expected to pass the U.S. as the world's largest air travel market by 2024, which should lead to heavier traffic on Ctrip.com. Ahead of the People's Republic of China's 70th anniversary on Oct. 1, China recently built its second airport in Beijing, the $17 billion Daxing International Airport, in response to an increase in travel demand.
Once Ctrip steers through the near-term turbulence, it has the potential to fly significantly higher. When the company reports its third-quarter earnings on Nov. 6, investors will be looking for better news before booking their reservations.